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Halliburton / KBR … The Sequel

In February 2009, Halliburton Co., KBR Inc., and Kellogg Brown & Root LLC agreed to resolve parallel DOJ and SEC FCPA enforcement actions concerning improper payments to Nigerian officials in connection with the Bonny Island liquefied natural gas project. (see here, here, and here).

The combined $579 million in fines and penalties remains the most ever against a U.S. company for FCPA violations.

Included in the web of companies involved in the Nigeria conduct was M.W. Kellogg Company (“MWKL”), a United Kingdom joint venture 55% owned by KBR. MWKL is mentioned in the linked DOJ and SEC materials above.

It looks like Halliburton’s exposure via M.W. Kellogg is not over.

Today, in a 10-Q filing (see here – p. 10), Halliburton stated as follows:

“In the United Kingdom, the Serious Fraud Office (SFO) is considering civil claims or criminal prosecution under various United Kingdom laws and appears to be focused on the actions of MWKL, among others. Violations of these laws could result in fines, restitution and confiscation of revenues, among other penalties, some of which could be subject to our indemnification obligations under the master separation agreement. Our indemnity for penalties under the master separation agreement with respect to MWKL is limited to 55% of such penalties, which is KBR’s beneficial ownership interest in MWKL. Whether the SFO pursues civil or criminal claims, and the amount of any fines, restitution, confiscation of revenues or other penalties that could be assessed would depend on, among other factors, the SFO’s findings regarding the amount, timing, nature and scope of any improper payments or other activities, whether any such payments or other activities were authorized by or made with knowledge of MWKL, the amount of revenue involved, and the level of cooperation provided to the SFO during the investigations.”

It used to be that companies with FCPA exposure could get a good night’s sleep after resolving DOJ and (if an issuer) SEC enforcement actions.

As this action (and others in recent years) demonstrate, the landscape has changed and “tag-a-long” FCPA-like enforcement actions or inquiries in other countries I think will become the new norm.

Iraq … And What Constitutes An FCPA Violation?

A couple of Iraq articles of interest to pass along.

As noted (here), yesterday in Washington D.C. the “Iraqi government, backed by the Obama administration, kick[ed] off its biggest post-Saddam investment roadshow […] to convince American businesses to join the country’s reconstruction efforts.”

According to the article, “[d]ozens of Iraqi government officials, provincial governors, state investment commission authorities and others will give presentations” and “present overviews of sectors such as oil, agriculture and construction” and “investment opportunities in about 750 projects.”

Bringing the topic home, there are lots of Iraqi “foreign officials” in Washington this week.

The article points out the obvious security and legal risks awaiting U.S. investors and businesses seeking to do business in Iraq.

The articles also concludes by saying that “[t]he biggest potential roadblock for most U.S. companies in Iraq is corruption” and that “American companies are generally under much closer scrutiny by U.S. regulators when it comes to overseas operations.”

Although the article does not mention the FCPA specifically, readers of this blog obviously know that the comment invokes and relates to the FCPA.

So here is the question.

Corruption is high in Iraq. But what constitutes “corruption” or more to the point, what constitutes an FCPA violation when doing business or seeking business in Iraq?

Last month, when commenting on the Green’s FCPA trial verdict, our friends over at the FCPA Blog (see here) said that the trial judge’s jury instructions “show just how simple the FCPA’s antibribery provisions really are” and noted that the only ones who seem to think that the FCPA is “complicated, technically challenging and obscure, poorly drafted and badly organized” are the lawyers who are trained to “quibble.”

I agree (and to use my favorite cliche) when offering a suitcase full of cash to a government official to secure a government contract, the FCPA is straightforward and provides little room for lawyers to “quibble.”

However, most FCPA issues are not as straightforward.

Given a number of reasons (the general lack of substantive FCPA case law, untested and unchallenged legal theories, etc.), there remains much about the FCPA that justifiably causes lawyers to … well … quibble.

So here is an exam question.

Let’s say you are interested in doing business in Iraq – specifically its oil and gas sector. You learn that, per the applicable production sharing agreement or joint venture agreement being proposed, x% of employees will need to be Iraqi. Problem is, these prospective employees are not technically competent to perform the job. You are then told that it will be up to you to establish special colleges to train them.

Scratching your head?

Well, this is no academic hypothetical, this is very real world.

Iraqi’s oil minister was recently quoted as saying (see here) that “Iraqis would have to make up 85 percent of the work force for the international oil companies doing business here.” The minister acknowledged the fact that Iraq currently lacked the “hundreds of thousands of Iraqi engineers and technicians” needed and that “it would be up to the foreign oil companies to establish special colleges to train them.”

So let’s run this fact pattern through the FCPA elements assuming that the foreign oil company is an issuer or domestic concern under the FCPA.

“foreign officials” check – at least under the DOJ/SEC’s untested and unchallenged assertion that employees of state-owned companies (regardless of title or rank) are foreign officials.

“thing of value” check – surely an education and obtaining technical skills is valuable.

“to obtain or retain business” check – it is a contractual term which you must agree to in order to get the business.

Sure the FCPA does have a “corrupt intent” element, but that element is often read out of the statute. For instance, many enforcement action merely set forth in conclusory fashion the corrupt intent element without providing any factual support.

The above Iraq example is not unique as most production sharing agreements or joint venture agreements in the foreign extraction industry contain similar terms or conditions requiring the U.S. company to buy “local content,” fund certain community causes, and the like.

What’s there to quibble about in such crystal clear examples as these?

Plenty.

FCPA Collateral Effects and Those “Pesky” Shareholders

I previously posted (see here) that while there is little in terms of substantive FCPA case law – this much is clear – there is no private right of action under the FCPA – enforcement of the law is in the hands of the DOJ and the SEC.

That does not mean that aggrieved third parties, including a company’s own shareholders, are without legal recourse should a company become subject to an FCPA enforcement action or merely disclose a potential FCPA issue.

Indeed, shareholder derivative litigation is often a collateral effect of FCPA disclosures or enforcement actions.

Case in point, the shareholder derivative complaint filed last week on behalf of Pride International, Inc. in Texas state court against certain members of its board of directors and certain of its executives officers seeking to remedy defendants’ breach of fiduciary duties. (see here).

The breach?

According to the complaint, “[f]rom 2001 to 2006, Pride repeatedly violated the [FCPA] through its business operations in numerous countries.” (see para. 1). “Certain current and former officers and directors of the company were aware of the violations and that the violations could, and eventually did, cause substantial harm to Pride and its shareholders, yet they knowingly failed to make a good faith effort to correct or prevent the misconduct.” (see para. 1).

The complaint alleges at para 23 that “[t]he individual defendants were aware of the violations well before the company announced the FCPA Investigation to the company’s shareholders and the public at large.” “Nevertheless,” according to the complaint, “the Individual Defendants took no action until an undisclosed employee of the company complained about the violations.”

The complaint then details Pride’s numerous public statements – beginning in March 2006 – regarding its potential FCPA issues and exposure. Certain of these disclosures and statements have been covered elsewhere (see here and here).

Beyond re-stating Pride’s numerous public statements, the complaint is sparse on detail, including little specific factual evidence to support the allegation that the Director Defendants “knew or were reckless in not knowing of the Company’s violations of the FCPA.” (see para. 50).

Regardless of the complaint’s ultimate fate, the Pride derivative suit is but the latest example of the collateral effects / sanctions a company will likely face when its business conduct is subject to FCPA scrutiny.

For those keeping track at home, such collateral effects / sanctions are yet another reason for companies to have effective, robust and well-communicated FCPA compliance policies and procedures which are periodically monitored and strengthened.

FCPA … the “Law Version” of Baseball

October is a month for baseball – the playoffs are under way and the World Series is right around the corner. Baseball aficionados are found of their statistics, and with good reason, there are a ton of baseball statistics to digest.

Well, the FCPA is quickly becoming the “law version” of baseball when it comes to statistics. Every few weeks it seems (see here for a prior post) FCPA aficionados have new statistics to digest.

The latest FCPA statistics come courtesy of Fulbright & Jaworski’s 6th Annual Litigation Trends Survey (see here for download).

According to a survey of over 400 corporate counsel in the U.S. and the U.K.:

(1) “the percentage of companies that has engaged outside counsel in the past 12 months to assist with a corruption or bribery investigation (i.e., FCPA and U.K. equivalent) has nearly doubled …” (see p. 37) and;

(2) “the incidence of due diligence for bribery or corruption relating to mergers, acquisitions or other transactions in foreign countries has more than doubled …” (p. 38).

These statistics should come as no surprise to followers of this blog who well know that FCPA compliance is a hot topic given the current aggressive enforcement climate.

Yet, the Fulbright survey (much like the prior Deloitte survey – see here) also shows that very few companies address FCPA risks on a pro-active basis. For instance, even though Fulbright’s survey found that the incidence of FCPA/bribery due diligence in M&A transactions has doubled, the number of companies engaging in such due diligence remains below 20%.

As to the “big picture” issue of whether perceived levels of corruption in a foreign country result in a company doing less business in that country, the survey shows that “only about half as many respondents as last year say their companies, at some point in the past, have decided against doing business in a country due to the perceived degree of local corruption.” (see p. 38). The one exception appears to be in the manufacturing sector “where 39% have made that decision v. 27% last year.”

Potpourri

The SEC recently posted on its website (see here) a draft “Strategic Plan for Fiscal Years 2010-2015” setting forth the Commission’s “mission, vision, values, and strategic goals” for the future.

Part of strategic goal 1 – to “foster and enforce compliance with the federal securities laws” – is a commitment to expand its “coordination efforts with foreign authorities, including […] close cooperation with foreign authorities in investigations relating to […] the Foreign Corrupt Practices Act.” (see pg. 16).

While not FCPA specific, a performance metric the SEC intends to use to gauge its progress of “fostering and enforcing compliance with the federal securities laws” is the percentage of enforcement cases successfully resolved (see pg. 17). The SEC notes that “[i]n general, the SEC strives to successfully resolve as many cases as possible, but, at the same time, aims to file large, difficult, or precedent-setting cases when appropriate, even if success is not assured.”

Setting FCPA precedent through the filing of a complaint, even if success is not assured, that is then subject to valid legal defenses based on the statute in a transparent, adversarial proceeding?

Wow, that’s a novel concept and in contrast to the current situation where FCPA “precedent” is set (or at least viewed as being set with the SEC’s encouragement) by the SEC alone through its enforcement program wherein the SEC is both a party and an adjudicator.

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I previously posted about the “War of Words in Ecuador” (see here)- a post about Chevron’s mammoth legal battle in Ecuador involving allegations of environmental contamination and how the long, messy battle now includes an FCPA component.

The posted ended by saying “this long, messy legal battle is getting more murky by the day.”

As detailed in a recent story in the New York Times (see here) “in recent days the plot has thickened further.”

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